On Monday a broker in the UK put out a research note on Swiss-based Glencore suggesting that equity in the company could be worthless thanks to its US$50 billion debt burden. Shares in the company which runs over 150 mining, oil production and agricultural assets and employs about 180,000 people fell by 29%, caused BHP and Rio Tinto to fall 6.7% and 4.6% respectively on Tuesday and contributed to wiping A$50 billion off the market capitalisation of the ASX.
Like all fund managers we follow the resources sector closely, as it is the biggest sector in the ASX after the banks and spend a large amount of time testing our assumptions. Indeed over the last year, we have travelled to both the hot and dusty mines of the Pilbara and to the Dickensian dark satanic steel mills of North and Western China. In the press there has been much written about the end of the mining boom, and whilst we see that the boom days are over where marginal mines were making supernormal profits, we don’t see that the wholesale dumping of mining stocks is the right move for investors especially at current prices.
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